Weekly Newsletter May 12th to May 16th
RECAPPING LAST WEEK
U.S. equity indices rallied sharply—breaking above key technical resistance levels—after the U.S. and China reached a better-than-expected agreement to curb tariffs for the next three months. The Nasdaq Composite index soared 7.2%, while the S&P500 jumped 5.3%—into positive territory for the year—and the Russell 2000 rose 4.5%. S&P500 sector returns were overwhelmingly positive, led by strong gains in technology. The semiconductor sub-index surged 10% after the U.S. Commerce Department officially rescinded the rule restricting advanced chip exports, which had been set to take effect Thursday. Healthcare continued to lag as UnitedHealth Group’s struggles weighed on the sector. Early-week gains in crude oil were pared after a potential nuclear deal between the U.S. and Iran—OPEC’s third-largest producer—suggested that global oil supplies may increase. Gold futures slumped 4% as trade tensions eased, while Bitcoin was nearly flat for the week. U.S. Treasury yields climbed despite tame inflation reports. Fed Chair Powell warned that longer-term interest rates are likely to be higher as the economic environment changes and Fed policy adjusts. U.S. CPI rose 0.2% last month, setting the 12-month rate at 2.3%--the lowest level since February 2021. Core CPI remained elevated at 2.8% YoY as shelter prices continued to rise. Producer prices surprisingly fell in April with the cost of services declining the most since 2009. Thus far, businesses do not seem to be passing along higher costs from tariffs as profit margin measures experienced a historic drop. Unlike in recent months, investors largely shrugged off another dismal consumer sentiment report with the index falling to its second-lowest reading on record this month. Most of the survey was completed before the U.S.-China tariff pause was announced. Inflation expectations ramped up yet again with year-ahead rising to 7.3% from 6.5% and longer-term inching up to 4.6% from 4.4%. In other economic news, U.S. retail sales slowed to 0.1% growth in April as households pulled back on discretionary spending items such as airline tickets and hotels. Retail giant Walmart surpassed sales expectations last quarter but warned that tariffs will lead to higher prices starting later this month. Manufacturing activity continued to soften this month, according to surveys conducted by the New York and Philadelphia Fed, while homebuilder confidence and housing permits slumped in what is typically the stronger spring season. Overseas, the UK economy grew more than expected in Q1 at 0.7%, although the Bank of England tempered its forecasts for the full year. Japan’s GDP contracted by 0.2% quarter-on-quarter and by 0.7% on an annualized basis as trade uncertainties caused an export drop.
THE WEEK AHEAD
Last week, Chair Powell made some interesting comments regarding the Federal Reserve’s approach to monetary policy. He said the FOMC needs to reconsider the key elements of its dual mandate regarding inflation and employment, given the possibility that supply shocks and price increases may become more frequent. Powell’s remarks suggest a potential for tolerating higher inflation as long as the jobs market remains strong. Traders have pushed out odds of the next interest rate cut to September with only one additional cut expected by year-end as recession fears have eased. However, the Moody's downgrade of the U.S. credit rating over the weekend adds another risk factor to consider, as long-term Treasury yields are on the rise. Turning to the upcoming week, the economic calendar is light with the global flash PMI readings the main releases of interest. In the U.S., retail giants Home Depot and Target will report earnings before the market opens on Tuesday and Wednesday, respectively. New and existing home sales round out the domestic calendar. Overseas, China was scheduled to release its monthly industrial production and retail sales figures on Sunday evening. The Reserve Bank of Australia is expected to reduce rates by 25 basis points on Tuesday. Inflation updates from Canada, the UK, and Japan are also on the docket. Finally, the first direct Russia-Ukraine talks in three years ended after less than two hours on Friday, dampening hopes for ongoing negotiations.
CHART OF THE WEEK
Tech shines
The Nasdaq Composite index ($COMP) was the standout performer of the major U.S. indices last week. The removal of restrictions for artificial intelligence (AI) chip sales abroad provided an immediate boost—semiconductor giant Nvidia soared 16% after announcing a deal to provide 18,000 GB300 chips to Humain, an AI company in Saudi Arabia. This huge transaction may set the tone for future deals with other countries that were to be on the restricted list. From a technical perspective, $COMP breaking out above the $18,280 level was an important development in the long-term Elliott wave structures. After the February peak there were two potential wave counts— either a longer-term top had formed, or a pullback was underway that could be followed by a move to another all-time high. Both paths had the same track until last week; however, if the top was already in, the $18,280 area should have held as resistance. The breakout’s strength suggests a more bullish wave count that targets the February highs for wave iii of 5, with another wave (ivv) potentially pushing the index to new highs. In support, the MACD is at a 52-week high, while the RSI hasn’t been this overbought since $COMP first broke above $20,000 in December. The 20-, 50-, and 200-day exponential moving averages are all pointing higher with the index price above them. Investors should be mindful of short-term corrections given the steepness of this ascent, but if former resistance holds as support on any pullbacks, the bullish trend remains intact.
Source: Charles Schwab Corporation
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